• U.S Treasury Bills as Collateral

U.S Treasury Bills as Collateral (Photo : Getty Images)

The U.S. owes China more than $1 trillion in treasury bonds, but it was not reason enough to trigger a trade war which the two countries believed would be disastrous to both of them.

But this does not mean that the U.S. will not use the issue as a leverage to negotiate its other deals with China.

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Although U.S. President Donald Trump received Chinese President Xi Jinping warmly at the recent meeting and trade talks in Florida, the threat still hangs over China that Trump may make good on his campaign promise to impose a heavy tariff on Chinese imports, according to an article in The Guardian.

If this happens, Beijing may be forced to take the option of selling the U.S. Treasury bonds it owed, which could damage the U.S. economy.

But analysts say China could not do that without damaging itself. Now, Trump has the advantage and it would be his decision to pursue what he believes is right.

Brian Davidson, an analyst at Fathom Consultancy, believes that Chinese leaders are aware of the social and political repercussions of a trade war and sensible enough to avoid it. China's efforts to provide stimulus to the economy was aimed at lowering the unemployment rate.

China is also dependent on the U.S., as nearly 4 percent of its GDP comes directly from U.S. exports. The U.S. gets its manufactured goods from other countries, not only from China, but China will find it difficult to get an export market as an alternative to the U.S.

"The U.S. position in these trade negotiations is strengthened by international trade law, and by China's systematic violation of obligations under World Trade Organization rules. The U.S. has scope to open, and win, lawsuits against China at the WTO, a point not lost on both leaders," Davidson said.

According to Davidson, China will find it difficult to assuage Trump with only a handful of future Chinese investments in the U.S. as Trump had pledged to take action on the U.S.'s $350 billion a year trade deficit with China.

Perhaps one of the things China can do to prevent Trump from imposing tariff charges is by lifting the barriers on U.S. tech companies and allow them to export to China.

But even if China opens its export market to U.S. companies, the U.S. may still apply its protectionist policy in some sectors such as steel, a touchy issue for Trump whose supporters have helped him win in the rust-belt states.